Jul 27th Chart of the Week: FOMC policy outlook and USD/JPY technical trends

This analysis examines how shifting interest rate expectations, hawkish dissenting voices, and ongoing geopolitical instability in the Middle East are impacting USD/JPY momentum and challenging long-standing currency trends.

Global financial markets face a pivotal week as major central banks align their policy outlooks with critical U.S. and global inflation data. The Federal Open Market Committee (FOMC) leads the agenda with its interest rate decision, closely followed by the Bank of England (BoE) and the Bank of Japan (BoJ), the latter of which will also release its Quarterly Outlook Report.

Compounding the monetary policy focus, the U.S. Bureau of Economic Analysis is set to publish the June Personal Consumption Expenditures (PCE) report, providing a definitive look at underlying inflation trends that will directly inform the Federal Reserve’s future guidance.

These news releases may have a significant impact on multiple foreign exchange pairs, such as USD/JPY and GBP/JPY, as market participants recalibrate their expectations for interest rate differentials.

The Federal Open Market Committee (FOMC) convenes on July 28–29, 2026, for its fifth policy decision of the year. According to the CME Fedwatch tool, consensus expectations lean toward the central bank maintaining the benchmark Federal Funds Rate within the 3.50%–3.75% target range.

However, unlike the dovish rate-cutting projections seen earlier in the cycle, money market swaps and Fed Funds futures now price in a nearly 33.7% probability of an immediate 25-basis-point rate hike, with roughly 50 basis points of total tightening priced in through year-end.

Market participants are closely watching for potential dissenting votes among hawkish committee members—such as Cleveland Fed President Beth Hammack¹ and Dallas Fed President Lorie Logan²—who have voiced concerns that inflation risks remain heavily skewed to the upside. Investors will dissect Chair Kevin Warsh’s post-meeting press conference for clues on whether the Fed intends to implement additional policy hikes before the end of 2026.

Adding a crucial piece of data to the macro backdrop, the U.S. Bureau of Economic Analysis (BEA) is set to release its June Personal Consumption Expenditures (PCE) report on Thursday, July 30, 2026, as the Federal Reserve’s preferred measure of underlying inflation.

According to Bloomberg’s economic calendar, headline PCE is projected to cool slightly to an annualized 3.7% (down from 4.1% in May), while Core PCE (excluding volatile food and energy components) is expected to ease modestly to 3.3% year-over-year3. Despite this incremental moderation, both figures remain noticeably above the Fed’s long-term 2.0% target.

A hotter-than-expected print on Thursday would validate hawkish dissenting views on the FOMC board and reinforce expectations for further interest rate hikes, potentially triggering a broader repricing across short-term yields and currency pairs like USD/JPY.

Intertwined with the domestic inflation picture is the ongoing conflict in the Middle East. The escalation in military operations across the region and renewed maritime disruptions along vital Red Sea shipping lanes and the Strait of Hormuz have reintroduced significant supply-side shock risks to global financial markets.

Energy markets have felt the brunt of these tensions, with crude oil price spikes directly threatening to reverse recent disinflationary gains in global transport and input costs. For foreign exchange markets, this geopolitical premium serves a dual purpose: it typically drives traditional demand toward the U.S. Dollar while simultaneously reinforcing central bank concerns that lingering energy inflation could force monetary policy higher for longer.

Leveraged funds: The mid-2026 surge in Leveraged Fund net-long USD/JPY (Net short Japanese yen) exposure, with participants accumulating over 100,000 contracts, reflected institutional traders’ positioning in line with the price uptrend. However, the most recent position change (Red arrow) reflects a potential institutional bet on a rebound in sentiment as USD/JPY trading nears multi-decade highs of 163–165.

This change in positioning could be primarily driven by the Bank of Japan’s shift toward policy normalization—now featuring 1.00% rates—and the heightened risk of Ministry of Finance intervention. Furthermore, narrowing yield differentials between Japan and other major economies are catalyzing a potential broad unwind of the classic Yen carry trade, forcing speculative funds to pivot from the Yen net short to net long positions, in a significant divergence from prevailing spot price trends.

Dealer/Intermediary: A negative divergence between price action and dealer positioning: price action remains at the same highs while dealer short positions are at a higher level than in mid-2024. The divergence suggests a potential change in sentiment.

• As of mid 2025, USD/JPY has been trading within an ascending channel, as indicated by the blue lines on the chart. Price action continued to find support and resistance along the channel borders throughout the entire duration. The channel included multiple runaway gaps supportive of the uptrend, while capturing price reactions to Middle East geopolitical developments and the pre- and post-FOMC April 29th meetings.

• As of May 2026, price action has been trading higher along a sharp internal trend line (Black line). The trend line, along with the EMA 9, SMA 9, SMA 21, and the weekly S1 of 162.74, form a critical confluence of support below price action. A break below the confluence may suggest the internal trend is exhausted.

• A confluence of resistance above price action is represented by the monthly R1 of 163.74.

• The green lines on the chart mark a negative divergence between price action and the RSI indicator.

• Although the current RSI is above 70, which suggests strong upside momentum, it also indicates an elevated risk of a short-term pullback or pause.

• Both MACD lines have remained coiled since mid June 2026, above the zero line, with small green histogram bars suggesting indecision.

As the market enters a high-stakes week defined by the FOMC’s policy determination, the critical June PCE inflation release, and ongoing geopolitical instability, the outlook for USD/JPY remains precariously balanced. While technical indicators like the prevailing ascending channel and RSI levels signal continued upward momentum, the divergence between price action and dealer positioning—coupled with the looming risk of BoJ intervention—suggests that market sentiment may be nearing an inflection point.

Investors should prepare for heightened volatility as the confluence of these macro-variables forces a recalibration of interest rate differentials, potentially testing the exhaustion levels of the current trend in the days ahead.

Footnotes

1 https://www.crainscleveland.com/politics-policy/ccl-hammack-inflation-worries-20260717/

2 https://finance.yahoo.com/economy/policy/articles/dallas-feds-lorie-logan-calls-173542669.html

3 https://www.bloomberg.com/markets/economic-calendar